What Does An Astronaut Has To Teach Investors? – Part I

Actually, a lot. First off, these guys spend their whole lives preparing themselves to go to a space mission – unfortunately, not always all of them go on a space mission (just like an investor studying a company until it finds out it isn’t suitable for an investment). Not only their lives alone, but also their families lives. They go through extensive physical and mental training, mastering their engineering skills, conducting pre-mortem and post-mortem analysis, learning how to be a team player and so on.

According to Col. Chris Hadfield,

“An astronaut is someone who’s able to make good decisions quickly, with incomplete information, when the consequences really matter. I didn’t miraculously become one either, after just eight days in space. But I did get in touch with the fact that I didn’t even know what I didn’t know. I still had a lot to learn, and I’d have to learn in the same place everyone learns to be an astronaut: right here on Earth.” 

Who investors are after all but professionals making good decisions quickly and with incomplete information, mastering their knowledge base for years?

Thinking about how an investor has to be prepared through learning, here is Col. Hadfield take on learning:

“I was in an enrichment program that year and the next, where we were taught to think more critically and analytically, to question rather than simply try to get the right answers. (…) Really, we learned how to learn.” 

Also, there’s no boring investment case task:

“I viewed it as a plum assignment, one learning opportunity after another.”

Definitely someone must compare things when thinking critically and analytically, otherwise how could someone judge if it’s either a good or bad thing? Col. Hadfield shares his experience on that:

“Astronauts have these qualities not because we’re smarter than everyone else. It’s because we are taught to view the world – and ourselves – differently. My shorthand for it is “thinking like an astronaut”. But you don’t have to go to space to learn that. It’s mostly a matter of changing your perspective.”

“Operational awareness – being able to see the big picture and focus on what could kill me next – is what kept me safe after I regained consciousness. (…) If you’re focused on the wrong things, you are likely to miss the very narrow window of opportunity to correct a bad situation.”

And yes, separating the signal from the noise comes with a large enough knowledge base, which comes with experience:

“Training in Houston, I hadn’t been able to separate out the vital from the trivial, to differentiate between what was going to keep me alive in an emergency and what was esoteric and interesting but not crucial. There had been so much to learn, I’d just been trying to cram it all into my brain. During the mission, too, I was in receive mode: tell me everything, keep teaching me, I’m going to soak up every last drop.” 

“I spent a lot of time on PTTs looking at the symptoms of false alarms versus actual system failures: pressure regulation, atmospheric constituent controls, the rendezvous sensing system – the list is long. Through this process I started to figure out what to pay attention to and what to disregard, which risks were the greatest and which would trigger the most negative consequences, and then I was ready for the actual Soyuz simulator, to see what the whole picture looked like.”

In order to learn, naturally, investors need to be great questioners, even for the obvious ones since you work with incomplete/biased information:

“What were the best answers to the obvious questions?”

Many times investors are “1st-level-correlated” to money-making opportunists, although

“It takes years of serious, sustained effort, because you need to build a new knowledge base, develop your physical capabilities and dramatically expand your technical skill set. But the most important thing you need to change? Your mind. You need to learn to think like an astronaut.”

Simply change “physical” for “mental” and “astronaut” for “investor”.

And when you get what’s needed to go “all-in”, have a sizable position in your portfolio in your great idea, it’s when you know

“Knowledge and experience have made it possible for me to be relatively comfortable with heights, whether I’m flying a biplane or doing a spacewalk or jumping into a mountain of corn. In each case, I fully understand the challenge, the physics, the mechanics, and I know from personal experience that I’m not helpless. I do have some control. (…) But in order to stay calm in a high-stress, high-stakes situation, all you really need is knowledge.” 

Another interesting metaphor is how austronauts’ (g)ravity is correlated to investors’ (g)rowth. As the space rocket is coming down to space (a 54-minute long trip!), (g)-force receives a multiplier attached to it, so astronauts get dizzy and feel so weak they can’t even stand up when they get down to Earth. After they arrive home again, they spend months with physicians monitoring their recovery. Isn’t it pretty much how investors feel with high multiples attached to companies with strong (g)rowth prospects when they are de-rated? High-growth indeed is foggy.
There’s a lot more we can learn from astronauts, which I shall share with you in the next coming post.

Mauboussin on Complex Adaptive Systems

Mauboussin was recently invited to seat at the Santa Fe Institute board, a research and education center which praises diversity to solve complex problems (by the way, there are tons of top notch materials and events to be checked out there). I found this interview with Mauboussin via compoundingmyinterests. Below, I highlighted and commented on some quotes:

#1. “The problem is that modeling complex adaptive systems is a lot messier than those other approaches.” 

Although, financial analysts focus on modelling EPS and finding out if it’s going to be . I’d argue the best research practice is understand capital allocators incentives & agenda.

#2. “This work showed that under some conditions returns actually move sharply away from the mean. This is counter to classic microeconomic thinking that assumes returns are mean-reverting.”

This reinforces the previous post on quality investing. 54% of companies tend to remain in the 1st quartile after a long period of time, assuring their moat is wide and deep enough to bear multiple attacks.

#3. “Diversity is essential, both in nature and in markets, and the system has to be able to take advantage of that diversity. On the flip side, when you lose diversity the system can become very inefficient. And that’s also what we see in markets—diversity loss leads to booms and crashes.”

Now let’s frame the diversity in investment teams. Or even in Santa Fe Institute, which is exactly how it’s done by the way. Different backgrounds working on the same problem is the knowledge leap.

#4. “Many businesses are being defined less by their specific market segment and more by the ecosystem they create. And it is often the case that in a battle of ecosystems, one will come out on top. So this set of steps provides a mental model to understand the process of increasing returns and, as important, how to identify them in real time.”

The concept is beautiful, but applying it is tough. When it comes to the environment/value chain businesses are in, the spectrum is too wide for a quick research project. Actually, it can be the work of a lifetime. The “knowable” facts are scattered in open field and the “unknown unknowns” are also out there. For those interested, critical thinking might be an useful vertical for you to dive in.

#5. “First, it’s essential to provide your mind with good raw material. That means exposing yourself to a lot of disciplines and learning the key tenets. It also means spending time with people who think differently than you do. Second, you have to be willing and able to make connections.”

I liked this quote because it uses plain language. Nothing better than that.

On Knowledge, Ignorance and Misperception

Many times we, research analysts, think we have completed the puzzle. Actually we NEVER do. What we actually do is think we have completed it. At the end of the day we are just tricking ourselves. If you think twice, our job is like playing the Jigsaw game – do you remember the movie? Things are getting scary, right? So, don’t freak out and let me explain it.

Analysts are flood with information from companies, sell-side analysts and stockholders – to name a few. This is just like playing Jigsaw’s game. The game is set up, someone controls your attention. You have to figure out  by yourself, just like a CIA agent, what the actual facts are. Distraction is across the corner, but the facts are buried down there. You will have to triangulate information across different sources in order to reach somewhere. Well, “somewhere” is a place where there are a lot more questions to be answered and that’s what knowledge means: knowing what you DON’T know. In other words, knowledge is ignorance acknowledgement. And so the game goes on. It’s an infinite game. Thus when you get home at night I suggest you to upgrade Munger’s lesson “Make sure you learn something new every single day” to “Make sure you end your day with more questions than when you woke up.”

Want to dig further?

Ignorance: How it drives science by Stuart Firestein

Finite and Infinite Games by James Carse

Holmes on the Brain – "A Study in Scarlet"

“I consider that a man’s brain originally is like a little empty attic, and you have to stock it with such furniture as you choose. A fool takes in all the lumber of every sort that he comes across, so that the knowledge which might be useful to him gets crowded out, or at best is jumbled up with a lot of other things so that he has a difficulty in laying his hands upon it. Now the skillful workman is very careful indeed as to what he takes into his brain-attic. He will have nothing but the tools which may help him in doing his work, but of these he has a large assortment, and all in the most perfect order. It is a mistake to think that that little room has elastic walls and can distend to any extent. Depend upon it there comes a time when for every addition of knowledge you forget something that you knew before. It is of the highest importance, therefore, not to have useless facts elbowing out the useful ones.”

– Sherlock Holmes